Here's Why CIE Automotive India (NSE:CIEINDIA) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies CIE Automotive India Limited (NSE:CIEINDIA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CIE Automotive India

What Is CIE Automotive India's Debt?

As you can see below, CIE Automotive India had ₹5.21b of debt at December 2024, down from ₹8.03b a year prior. However, its balance sheet shows it holds ₹13.2b in cash, so it actually has ₹7.95b net cash.

A Look At CIE Automotive India's Liabilities

According to the last reported balance sheet, CIE Automotive India had liabilities of ₹21.8b due within 12 months, and liabilities of ₹10.1b due beyond 12 months. On the other hand, it had cash of ₹13.2b and ₹9.16b worth of receivables due within a year. So its liabilities total ₹9.61b more than the combination of its cash and short-term receivables.

Since publicly traded CIE Automotive India shares are worth a total of ₹151.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CIE Automotive India boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, CIE Automotive India grew its EBIT by 2.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CIE Automotive India can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CIE Automotive India may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, CIE Automotive India's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that CIE Automotive India has ₹7.95b in net cash. On top of that, it increased its EBIT by 2.9% in the last twelve months. So we are not troubled with CIE Automotive India's debt use. We'd be motivated to research the stock further if we found out that CIE Automotive India insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.